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Commerce gets social: How social networks are driving what you buy

This article was taken from the February 2011 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content bysubscribing online.

Ryan Romanchuk recently bought some Scott Naturals toilet paper, refills for his Reach dental flosser, Strunk's The Elements of Style (fourth edition) -- plus a Glock 23 semi-automatic pistol. In fact, every time the 25-year-old software engineer spends money -- on The Hurt Locker at iTunes, or a Wolf Trap gold-mining sluice -- he lets the world know on Blippy, a website that automatically and very publicly shares all of its members' credit card transactions in real time. Launched last January and backed by $13 million from investors including Twitter's Evan Williams and Sequoia Capital, Blippy also publishes transactions on your eBay, Amazon and other linked accounts. And because the site encourages friends to comment on items shared, it says users can "watch... purchases come to life".

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For Romanchuk, based in Palo Alto, California, such sharing is a means of self-expression that earns social capital. "I share because I get validation through my peers," he says. "It's the most honest way I can express my interests and values. It's a great feeling to find complete strangers who have watched the same movie or read the same book, and it's rewarding when others reach out about the things I reviewed that I care deeply about. It also influences my purchases: if one of my friends watches a movie, I almost always add it to my Netflix queue."

Romanchuk doesn't mind that, last April, Blippy let Google expose some users' credit card numbers: he is hooked. Indeed, he has now got a job there writing code. "That initial fear [of sharing] is what really gets me excited about this space," he says. "You quickly realise that obsessively reviewing the things you buy is, well, a lot less scary than you thought, and you have fun in the process."

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Now the race is on to monetise it by tapping into the influence each of us wields over our friends. From group-buying sites to product-recommendation services, hundreds of startups are clamouring to build a social layer on top of online commerce.

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China's $1bn shopping app turns everyone into trendspotters

ByDavid Rowan

The act of "turning products into conversations" may not always imply an obvious business model -- but that's not preventing "social commerce" businesses from attracting funding, buzz and in some cases substantial revenue streams. "If I had to guess, social commerce is the next area to really blow up,"

Zuckerberg said last August, when Facebook launched its Places mobile-location service. By November, Deals had been added to Places -- allowing partners such as Gap and the local takeaway to reward members who check in to their local store or share offers with friends. More than a million third-party sites, meanwhile, have integrated Facebook's open platform to let members connect with friends and share their opinions on those sites: half of comScore's Global Top 100 websites have integrated with Facebook.

And each time a member clicks the "Like" button on one of these sites, they signal their affinity for a product or a brand to their group of friends. That sharing generates real cash: ticketing site Eventbrite.com says one Facebook share of an event drives 11 visits to the site and generates $2.52 (£1.60) in sales, compared with $0.90 for an event shared on LinkedIn and $0.43 on Twitter.

Venture capitalists see a huge opportunity. In October, Kleiner Perkins Caufield & Byers (KPCB), the Silicon Valley investors who took early stakes in Google and Amazon, partnered with Facebook, Amazon and Zynga to launch a $250 million fund to back entrepreneurs inventing social applications and services. "Social is just getting started and the opportunities are vast," KPCB partner Bing Gordon said at the launch. "Every business, organisation and entrepreneur should have a social strategy." The fund's investments in social commerce include Lockerz, "a community of trendsetters and tastemakers who love to shop, play and connect on the web" and who earn discounts on music, fashion and electronics. In barely a year, Lockerz attracted 17 million members.

The potential for social commerce today is "infinite", Gordon tells Wired. "All internet and connected mobile users will tap into their social networks daily. It is a friction-free way to build social capital effortlessly, and ha strong network effects." So, you introduce new friends to a service or goods that you value. Eventually, Gordon says, "every we page will have your friends' profile picture on them, based on their relevance to that site Every ecommerce site will have to adapt."

Purchasing decisions, of course, have always been influenced by friends' opinions. But the efficiencies and scale of today's social internet can transform a retail or service business overnight whether through membership-deals site such as Groupon and vente-privee.com or via product-discovery communities including Polyvore and Kaboodle. Location-aware smartphones, meanwhile, add the immediacy of the socially shared real-world check-in -- with app-based services such a Stickybits encouraging users to scan bar codes and then share product comment using video, photos and audio, thus earning points that can be cashed in on offers. Danny Rimer, a partner at Index Venture in London, noticed a year ago that something big was starting to happen. "We picked up a trend on YouTube called v-hauling," he says. "We saw these 18 to 25-year-old girls going online with their most recent shopping bag from Topshop and Target, explaining to the camera why these were awesome goods. And some of them had followers in the hundreds of thousands." Today the leading YouTube video-haulers include 17-year-old juicystar07, "a girl who loves to play around with makeup" and has accumulated 98 million views; andDulceCandy87, a 23-year-old from Los Angeles whose videos have been seen more than 60 million times. She now states on her YouTube channel: "This blog accepts forms of cash advertising, sponsorship, paid insertions or other forms of compensation."

Rimer's response has been to invest in the sector, including in Swipely (a sharing site that seeks to "turn purchases into conversations"), buying club Keynoir, social-payments platform Trial-Pay, and Go Try It On, which offers responses from users to the question: "Do I look good in this?" "At Go Try It On, the level of engagement is nuts," says Rimer, 40. "It's this notion that a transaction is more communication than the be-all and end-all. We believe that when you go to checkout, the end of that activity is sharing what you've purchased with friends. Everything is going to have to integrate a social layer in commerce. No question."

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He cites evidence from Dan Ariely's book Predictably Irrational that consumers change from sceptics to advocates once they own a product. "When we buy something, we become its greatest champion. That is what social [commerce] can do. It really is transaction as communication. The internet lends itself to promoting and building validation, confirming that what you've bought is great. It's one of the irrational, unexplainable but inherent bits of human behaviour."

For marketers, the trend has huge implications. With online commerce driven increasingly by social influence, traditional marketing becomes ever less effective. "With millions of people in the role of publisher, the challenge for marketers is how you tastemake," says LinkedIn founder Reid Hoffman, an early Facebook investor. "Rather than buy [ads in] one TV show, it's better to be in the fabric of the conversations. It makes more sense to participate in, say, girls displaying their purchases."

Marketers need to understand that they have lost control over their brands online, he says. "People will converse about your brand independently of you. You can't stop the negative comments.

But what you can do is maximise the likelihood of a distributed set of very good conversations. That has to be your strategy. And some new brands will be created or boosted based on smart techniques -- such as [YouTube video series] lonelygirl15, or the Old Spice viral campaign."

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That's why Hoffman is backing social-commerce startups such as Swipely and Shopkick, whose smartphone app rewards consumers for visiting a physical store, for scanning product barcodes, and for signing up friends. "If social commerce can reach hundreds of millions of potential participants, then I'm interested [in investing]," he says. Still, he cautions that only certain categories of product will naturally be part of a social conversation. "You don't say, 'Wow, I bought this really cool toaster,'" he says. "But it's really relevant with music, movies, books -- they are part of our identity, and they're repetitive purchases. We buy maybe three books a month, at least one album a month, see three movies. That's key. Look for purchases that can be part of people's everyday lives."

Star Wars Trilogy DVD and five hope he'll read The Kite Runner. The most popular Levi's jeans among Hernandez's peer group are the dark, aged original 501s, although the slim, straight 3D Coated 514s are also causing a stir. He also knows, each time he logs on to Amazon.com, what his friends and family might appreciate for their next birthday. "I had no idea that my cousin liked those books," he reflects as his eyes scan his customised page. "I know now what to buy her."

There's more than a personal reason why Hernandez is excited by the potential of social product discovery. As Facebook's head of international business development, he sees social commerce as the most powerful way to drive its partners' online sales -- and all through his company's 500-million-plus-member social graph. "There was an Econsultancy survey that said that 90 per cent of purchases have some sort of social influence -- your friend recommended it, or you saw it on somebody," says Hernandez, 35. "Until now there's been no way of getting that 'girls in the mall' effect on a large scale. That's the opportunity: it's huge and untapped. And we have the benefit of both scale and identity."

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Gallery: Relay wants your phone to be a wallet and Twitter a shop

ByCara McGoogan

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As the net becomes more social, your Facebook identity "will let magic happen", he says: of the billions of recommended songs or shopping deals, you'll pluck out those relevant to you. "Social recommendation can help you discover things that some algorithm won't," he says in the company's London offices. "Over the years Amazon has built an amazing recommendation system for me, though they've never known who my friends are. But now they've integrated my Amazon account with my Facebook account, with all my preferences but also my friends and their preferences. So, with one click, Amazon knows this whole other persona, based on my and my friends'

Likes. The storefront becomes a social storefront."

It's early days -- Facebook integration is restricted to the US Amazon site -- but the firm is prioritising new commerce applications that can drive member engagement, product discovery and, ultimately, its partners' sales. Its focus on social commerce will have an impact across the internet: Facebook already accounts for 23 per cent of all display-ad impressions in the US, compared with just 2.7 per cent for Google, says comScore; and in the UK 1.75 million users were referred from Facebook to one of the top-200 ecommerce sites last October. Mobile use of Facebook has grown in the past year from 65 million to 200 million members.

Suddenly, Facebook starts looking like the world's most efficient shopping mall, where half a billion people are led to goods they might want to buy.

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'Radical change' needed in ecommerce, says Robert Gentz

ByEmily Reynolds

What about data protection? Three years ago, Facebook attracted criticism and privacy lawsuits over its Beacon advertising programme, which exposed purchases on third-party websites to users' News Feeds without their explicit consent. The service was later shut down, and the firm says lessons were learnt.

Hernandez says consumers want to share if there's a benefit. "I'm most excited about Deals [coming to the UK in 2011] -- so when you check into a physical Gap, it gives away 10,000 pairs of jeans.

Imagine you run a Gap promotion on Facebook, and track who walked into the store and cashed it in for a pair of jeans. It's the advertiser's holy grail: how does my brand money lead to foot traffic? It means you can figure out the return on your advertising. And users get to discover deals -- your friend checks in and cashes in a deal, it gets shared. So if I learn that Tommy Hilfiger is doing an interesting deal nearby, I might just go and check it out myself. It amplifies the coupon model to 500 million users. There's discovery, sharing, bragging about what you've bought, and redemption at the storefront. The beautiful part of my job," he says, "is a lot of this is happening without my having to go and talk to people."

Ever since the British inventor Michael Aldrich first linked a television set to a telephone line in 1979 to demonstrate online shopping, ecommerce has remained fundamentally a linear, one-to-one process. There were attempts at collective buying during the first dotcom boom, through websites such as LetsBuyIt.com, but most early transactional websites were little more than online catalogues.

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Gallery: 'Radical change' needed in ecommerce, says Robert Gentz

ByEmily Reynolds

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Amazon, since 1995, has algorithmically mined collective data to suggest products your purchase history suggests you may like. But only recently have significant numbers of consumers begun to share their location data and access to their personal networks to allow recommendations to be more precisely targeted.

Yet for most consumer brands, social networks remain a broadcast medium rather than a conversation. Buddy Media, a New York business that helps companies manage their social-media presence, is undergoing extraordinary growth as brands switch marketing to Facebook and Twitter: up from zero to 500 clients in 18 months, growing from 30 to 120 employees in a year, and a path to what founder Michael Lazerow says will be hundreds of million of dollars in revenue.

On Facebook, Buddy Media campaigns have led to 539,400 people "liking" Borders, 333,824 liking TJ Maxx, and 103,947 liking Tory Burch. That's because, as Lazerow sees it, they have stopped being retail brands and have morphed into publishers. "Facebook is now

'This place where 50 per cent or more of our customers live online, where a quarter of all US ad impressions are -- if we don't go there I'll be fired.' So all of a sudden, brands are publishers who sell directly through social channels -- bookstores, travel companies. And we're just at the beginning."

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Farfetch CEO on what's in store for high street retail

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For Borders, Buddy Media developed a strategy of discounting, rewards, and the promotion of ereading, backed by weekly offers and content based on author visits to stores. "They now own a cable network that reaches 500,000 people, far more than the bigger Barnes & Noble," Lazerow says. "That will be a fundamental driver of their business. If I was running a brand, I'd want to be a cable channel that I can programme any way I want."

Social commerce shares many of the psychological drivers of social gaming. "It's about ego, sharing your status and accomplishments, a quest for positive validation," explains Shervin Pishevar, founder of the Social Gaming Network and an investor in startups ranging from check-in service Gowalla to Klout, which quantifies people's influence across the social web. "It applies to experiences as well as physical products: 'I was able to climb Mount Everest and here are the photos.' Other people will say, 'Hey, I want to achieve that' -- in the way that in

Increasingly, Pishevar says, personal reputation and influence will drive what others buy. "I call it people rank, as opposed to

[Google's] PageRank. Just as PageRank gives more weight to a page with more authority, we can now identify the most influential people in a space. Traditional marketing? It's dead. It's real-time social marketing and commerce that really matter now. There will be multibillion companies in the social-commerce space. We're where we were with social gaming two or three years ago."

Yet beyond psychology, is there any science to the power of influence in social networks? Nicholas Christakis, the Harvard professor of medicine and sociology who, with James Fowler, wrote

Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives, has been trying to find out. Their book shows how obesity, happiness and even divorce can spread in networks between close friends. But what about purchasing decisions?

On September 15, the actress Alyssa Milano, with more than a million Twitter followers, tweeted a link to Connected's Amazon page. But not a single copy was sold that day. Curious to know why, Christakis and Fowler set up an informal experiment. They asked publisher Tim O'Reilly to send a positive tweet about Connected to his (more intellectually curious) 1.5 million followers. Christakis estimates one or two books were sold. Yet when Susannah Fox of the Pew Research Center tweeted the link to her 4,345 followers, three sales were made.

Christakis's conclusion: a small group of attentive followers may be more easily influenced than the millions who follow a famous name. "Influence can flow through those online ties, but only to the extent to which those ties represent real connections," he says. "Just as if a real friend phones you it will affect you, but a telemarketer won't. Among all those weak [online] ties are some strong ties. And they can make all the difference." To her far smaller number of followers, Fox's tweets felt more real -- and so affected their behaviour.

In another, more formal, study, the two followed 1,700 interconnected college students on Facebook over four years. On average each student had 110 Facebook friends, but only about 6.5 close social friends. They found that only when a "real" friend on Facebook recommended a movie or a book was it likely to be taken up. "We're at the early stages of understanding the properties of virality," Christakis says. "Not everything spreads. And what spreads doesn't do so in the same way -- germs spread differently to money or emotion. There is social contagion, but not everything will spread, or to the same extent. "For a behaviour to spread through loose online ties, it helps tremendously if people near to you [in the network] are adopting the same behaviour simultaneously. So, if you're in a network that's tightly interconnected with friends, and you change your behaviour and that causes Tom to change his behaviour, now Dick is exposed to you and Tom changing. But if you're not all interconnected, if you and Tom change behaviour, there's no effect on Dick. Something like behaviour, which spreads by complex contagion, needn't spread through networks such as Twitter."

Behavioural science is catching up. "In the next decade, we're going to learn things about human behaviour that will affect everything from commerce to social policy," says Sinan Aral, of the Stern School of Business, New York University. Aral is chief scientist for Social Amp, which has helped Levi's and 1-800-Flowers tap into social networks. Firms can explicitly engineer products, he says, so they are more likely to be shared among peers. "The companies that will succeed with social shopping are the ones that have science under the hood."

But if your friends are promoting such "engineered" products to you, won't you resent this commercialisation of an essentially personal conversation? "As long as I'm not negatively ambushed and you're providing me value, then I'm generally interested," says Reid Hoffman. "I'm fine with 'Here's the thing I like to buy' -- especially if it helps me find a great MP3 player I might like."

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Privacy fears are overstated, says Danny Rimer. "It's a generational thing: the new generation want to scream from the mountaintops what they've bought and share the value with the largest audience they can get."

Thomas Power, from Farnham, Surrey, is a convert. He's joined 700 online communities, including Blippy, in the hope of as yet unspecified benefits. "Even if I get hacked I don't mind, because that's part of learning," says Power, 46, who runs social-business network Ecademy. "I find the more that I share, the more people phone me up."

He's ready to do deals. "I spend £7,500 a month on my cards, yet Visa does nothing with the data. They don't offer deals -- there's no incentive to share transactions. If I fly British Airways, BA should say, 'Every five flights we'll upgrade you.' If they were smart," he says, "they'd contact Blippy and say, 'We need to do something special for Thomas.'"